Financial reporting's eternal quest: what do users want/need?

• Author: Sinnett, William M.
• Position: FERF@65

This fourth and final article in the series on 65 years of research studies by Financial Executives Research Foundation (FERF) highlights the number of reports that have examined issues pertaining to financial reporting and accounting. The extent of the research in this area demonstrates FERF's commitment to finding what information is most useful for making business decisions and how it should be presented to be better understood.

In 1978, the Financial Accounting Standards Board issued its Statement of Financial Accounting Concepts No. 1, which defined the purpose of financial reporting. This definition has also provided the backdrop for the many FERF studies.

It stated: "Financial reporting is not an end in itself but is intended to provide information that is useful in making business and economic decisions. ... Financial reporting should provide information that is useful to present and potential investors and creditors and other users in making rational investment, credit, and similar decisions. The information should be comprehensible to those who have a reasonable understanding of business and economic activities and are willing to study the information with reasonable diligence."

Addressing User Needs

Financial Executives Reasearch Foundation's story begins as The Controllership Foundation (predecessor to FERF), which received its charter from the State of New York on Nov. 29, 1944. At the time, most financial reports were considered by many as insufficient, unreliable and confusing. The lack of rules resulted in use of loose, imprecise terminology, allowed for a wide range of acceptable accounting methods and yielded a general lack of comparability between years and enterprises.

The American Institute of Certified Public Accountants' Committee on Accounting Procedures (CAP), which had been relatively inactive since its 1936 inception, accelerated its agenda and publications at the insistence of the U.S. Securities and Exchange Commission.

Early Years. In The First Forty Years, historian Paul Haase reported that the first list of potential research projects for the new foundation was presented at the 1946 Annual Meeting of The Controllers Institute of America by Daniel J. Hennessey, of Long Island Lighting Co. The first project on the list was "an inquiry through public opinion research into the degree of acceptance by the public of facts and figures of business accounting."

The foundation's first four research reports, published in 1947 and 1948, investigated the public's perception of publicly held corporations and their financial statements, and what the public wanted to know about these corporations.

The second report, The Public Acceptance of the Facts and Figures of Business Accounting, by Opinion Research Corp., revealed three disturbing facts: First, that the public has an erroneous impression of the amount of profit made by business firms; that a considerable percentage of the public does not understand the terms used in business reports; and that in spite of independent accountant's audits, a substantial percentage of the public distrusts the financial statements of business.

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The foundation commissioned the Roper Organization to do a follow-up study. It asked: "How can the modern corporation best tell the public what the public wants to know about the corporation's activities?"

The results from 754 interviews of stockholders were published in 1948 as What Information People Want About Policies and Financial Conditions of Corporations. This report explained that the stockholder "is oppressed by the complexity of financial data and frightened by what seems to him the incomprehensibility of accounting language."

Later Research. During the 1970s and '80s, the "financial section" of a company's annual report was expanded to accommodate new disclosures required by new accounting standards issued by the Financial Accounting Standards Board and new disclosures required by the SEC. As annual reports grew in size and complexity, companies began questioning just how much financial information can really be assimilated by the average reader.

As an experiment, members of the Committee on Corporate Reporting (CCR) of Financial Executives International--then Financial Executives Institute--were invited to rewrite their 1981 annual...